Rarely has the oil industry been under such scrutiny as today with both the UK and Scottish cabinets meeting in North-East Scotland to mark the publication of the Final Report of Sir Ian Wood’s Maximising Recovery Review.
The Review is very much in line with the Interim Report published last November (see our Law-Now here) in recommending the introduction of a new tri-partite strategy for Maximising Economic Recovery from the UKCS (MER UK) involving HMRC, industry and a new regulator at arm’s length from government. The new regulator will be funded by industry and will have both new powers and additional resources to engage in a much more hands-on style of regulation. Sir Ian believes there is potential for this new approach to increase production over the next two decades by at least 3-4 billion barrels.
Sir Ian recognises the huge potential of the UKCS to contribute to the UK’s energy security, GDP, balance of payments and employment but identifies challenges in terms of a lack of a pipeline of capital expenditure on field development, falling production as a result of lack of development of new fields and reduced production efficiency on existing fields, exploration at all-time low levels, ageing assets facing decommissioning and a failure to take up new technologies as well as cost pressures and competition for investment from other oil and gas regions.
The issues behind these trends are complex but he identifies the focus of operators on their own individual commercial objectives rather than maximising economic recovery across fields or within regions, past failures of fiscal policy, an under-resourced regulator, under-investment by operators in their assets, and a lack of collaboration across industry.
To tackle these issues Sir Ian has now put a little flesh on the bones of the strategy he proposed in his interim report. The Regulator should be an arm’s length body with the ability to recruit top quality personnel with appropriate industry experience in commercial, legal, engineering, petroleum engineering, economic, geological and geophysical disciplines. It should be led by an individual with significant industry experience who would work closely with the Energy Minister and policy officials. It would be funded entirely by industry. The Regulator might also take responsibility for onshore oil and gas and for CCS.
He identifies six key sector strategies which the Regulator will need to develop together with HMRC and industry addressing exploration, asset stewardship, regional development, infrastructure, technology and decommissioning.
In order to implement these strategies the new regulator will need new powers to resolve disputes, to attend operating committee meetings, to have access to data and to impose sanctions including private and public warnings, removal of operatorship and ultimately removal of licenses.
Industry would need to make a number of commitments in turn to the new strategy, to developing cluster plans, efficient sharing of infrastructure, development of new business models such as independent development and ownership of transportation infrastructure, improved collaboration and reductions of legal and commercial burdens.
- Although fiscal policy was outside the remit of Sir Ian’s review, it is interesting how often he makes reference to it – among the specific suggestions made by interviewees and referenced in the report are extension of field allowances to incentivise EOR and incentives for smaller operators to carry out seismic surveys and exploration drilling, possibly in the form of tax credits where those operators have no production revenues against which to set reliefs.
- Typically, one would expect the process of putting in place a new regulatory regime of this type to take several years – however, it is not clear the UKCS can afford to wait that long if the opportunity Sir Ian presents is to be seized. Ed Davey’s response suggests that there is a real sense of urgency in government about implementing these recommendations: “We will develop plans for a new arms-length body, and will introduce legislation in the Fourth Session to bring the new body into effect. The next step will be to appoint a Chief Executive Officer, with the aim of having that person in post in the summer 2014, so that they can steer the work to design and build the new body, which could being operating in shadow form in the autumn. Stakeholders are being invited to participate in an interim Advisory Panel on implementation, which Sir Ian Wood has agreed to chair. I will publish a formal response to the Report – along with a more detailed roadmap for implementation - later in the spring.”
- The challenge of recruiting the right personnel to staff the new regulator in an overheated market is not to be underestimated. DECC currently has 50 staff in its licensing, exploration and development unit. Sir Ian compares this to the Norwegian NPD’s 200 staff. Assuming the plan is to increase the UK Regulator to a similar size, that is likely to add fuel to the flames of the current salary inflation.
- Sir Ian points the finger at lawyers: “Evidence clearly indicates the UKCS is perceived as being one of the most difficult and adversarial legal and commercial basins in the world, disproportionately driven by risk aversion to the detriment of value creation, particularly when the transaction is not material to one party. Industry must challenge this culture and senior management must play a leading role in delivering change…” “… operators should be given one year to come up with their solution to simplify the complexity and significantly reduce the time required in UKCS commercial and legal negotiations. If industry cannot produce a satisfactory framework, the new Regulator should make its own recommendations which should then be included in the licence terms.” This may perhaps underestimate the difficulty of retrofitting a new system onto a regime in which any operation is dependent on a web of existing contractual arrangements going back decades and involving dozens of entities with legitimate expectations – however, it suggests there will be plenty for the lawyers in the industry to do.
The Wood Review final report is available here.
The Government response is available here.